nps tax benefits and schemes

NPS Tax Benefits and Sections: Check National Pension Scheme Benefits

NPS Tax Benefits and Schemes: The full form of NPS is National Pension Scheme. The main objective of this scheme is to encourage individuals to invest in the National Pension Scheme launched by government officials of India. Before investing in the National Pension Scheme, one must be aware of the NPS schemes and the benefits in order to choose the right scheme before investing. Also, NPS Schemes helps individuals in the term of tax benefits.

To help you understand all the details of NPS Tax Benefits and Schemes here is a detailed article on what are things which one must consider before investing in NPS and what are the NPS Tax Benefit for Government or Private employees. Read on to find out more.

What Are The Types Of NPS Accounts?

Under the NPS Scheme, there are two types of accounts. Tier I & Tier II accounts.

  1. NPS Tier I Account: Any individual who would like to invest under NPS Scheme will have to register for a Tier I account.
  2. NPS Tier II Account: The tier II account is completely optional. An individual can either register for a Tier II account else can ignore it. However in order to register under a Tier II account, one will have to mandatorily register under a Tier I account.

 NPS Tier 1 Tax Benefits

The main objective of the NPS Tier 1 scheme is to invest and save enough money for their retirement period. Thus any individuals wouldn’t be able to withdraw the money from the NPS Tier I account. However, when it comes to the NPS Tier II account, the officials are not offering any tax benefits but one will able to withdraw funds as and when required from the Tier II account, unlike the Tier I account.

NPS Tax Benefits – Tier 1 Account

The investments which are made under Tier 1 NPS accounts are eligible for tax exemption under the following 3 schemes of NPS.

  1. Section 80 CCD (1) or Section 80 C
  2. Section 80 CCD (1b)
  3. Section 80 CCD (2)

Tax Saving Benefits in NPS Tier 1 Account

  1. Section 80CCD(1)(section 80C): This section of income tax supports various tax deductions to the investors. When it comes to a salaried employee, he/she claim 10% of salary i.e., up to 1,50,000. On the other hand, self-employed individuals can claim up to 10% of gross income.
  2. Section 80CCD(1b): As per this scheme, one can avail of the tax benefit up to Rs. 200000. This benefit can be availed after the deduction offered under Section 80C.
  3. Section 80 CCD (2): Section 80 CCD (2) of the Income Tax act supports tax deduction on the employer contributions which can be availed by both private and government employees. Under Section 80 CCD (2) government employees can avail of tax benefits up to 14% on salary whereas private employees can avail the tax benefits up to 10% on salary.

Overview of Tax Deductions Offered By NPS

The highlights of Tax benefits offered by the NPS scheme are tabulated below:

Section Name Tax Deduction Source Maximum Limit
Section 80C The deductions are directly made from salary towards retirement Rs.1,50,000
Section 80CCD Deductions are made over and above after Section 80C Rs. 2,00,000
Section 80CCD (2) The deductions are made on the employer’s contribution. 14% of Gross Salary for Govt employees

10% of Gross Salary for Private employees

NPS Tax Benefits: Difference Between Tier I and Tier II

The difference between Tier I and Tier II account under NPS for Tax benefits are tabulated below:

NPS Tier I Account NPS Tier II Account
NPS Tier I account is otherwise called a Pension account. NPS Tier II account is otherwise called an investment account.
A minimum of Rs.6000 should be contributed annually for NPS Tier I account. A minimum of Rs.12,000 should be contributed annually to the Tier II account.
Funds from NPS Tier I account cannot be withdrawn. Funds from NPS Tier II accounts can be withdrawn as and when required.

NPS Income Tax Benefits

The NPS Income Tax benefits for salaried and self-employed individuals are explained in details below:

NPS Income Tax Benefit for Self-employed Individuals

Self-employed individuals can claim up to 20% tax exemption by contributing their Gross Income which includes basic and dearness allowance under the NPS Section 80 CCD (1). The maximum limit of gross income is up to Rs. 1,50,000.

NPS Income Tax Benefit to Salaried Employees

Under section 80CCD(1), any salaried employee can claim up to 10% of tax exemption by contributing their salary to NPS. The salary which they are contribution will include Basic & Dearness allowance.

Additional Tax Benefits by NPS

The additional Tax benefits by National Pension Scheme are given below:

  1. Any individual, let’s say salaried or self-employed investing up to 50,000 in NPS (National Pension Scheme) will be eligible for additional tax deduction under Income Tax Act –  Section 80CCD (1B). This exemption can also be applied in addition to Section 80C.
  2. Any person voluntarily contributing towards the NPS scheme will get an additional benefit of Rs.500000 under the 80CCD (1B) which would be over and above the cover limit of Rs. 1,50,000 under 80CCE.
  3. Any salaried employee can opt-out of investing in EPF and choose National Pension Scheme.
  4. Any private employee can exit from NPS once they reach the age of 60.
  5. For taxpayers in the tax bracket of 30% can avail of an additional deduction of 50,000. Whereas for the lower tax brackets of 20% to 10%, can save up to 10000 to 5000 under NPS schemes.
  6. Since the NPS investments made in Tier-1 cannot be withdrawn, tax benefits are provided.
  7. Under the NPS scheme, any individual can find a range of investment options. Any individual can also switch from one investment to another.

FAQs on NPS Tax Benefits & Schemes

The frequently asked questions on NPS Tax Benefits and Schemes are given below:

Q. How much should I invest in NPS for tax benefit?
A. Investing in NPS completely depends on the individual. Check out the NPS Scheme tax benefits provided on this page to understand which scheme is suitable for you and invest accordingly.

Q. Can I invest in both NPS and PPF?
A. Yes, any individual can invest in both NPS and PPF.

Q. What is the NPS Tier 2 Tax Benefit? 
A. The NPS Tier 2 tax benefit is applicable only to government employees. Government employees can avail of income tax deduction under Section 80C annually if they have lock in period of 3 years.  However, Private employees cannot avail of any tax benefits under NPS Tier 2 account.

Q. What is the minimum investment that one should make in NPS?
A. Any individual will have to make a minimum investment of Rs.1000 per year in an NPS account.

Now that you are provided with all the necessary information about NPS Contribution Tax Benefit and we hope this detailed article is helpful to you. If you have any queries about NPS Employee Contribution Tax Benefit or in general about this page, ping us through the comment box below and we will get back to you as soon as possible.

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